Gyroscopic Investing

Posted: **Sat Jul 14, 2012 6:16 pm**

Using some of Clive's ideas regarding volatility capture on leveraged ETF's I ran a simple portfolio of 50% ERX (Direxion 3x Energy) and TMF (Direxion 3x Long Dated Treasury). Rebalanced quarterly for the last 36 months produced the following:

Total Return: 296%
CAGR: 58.3%
Sharpe: 1.55
Max DD: 22.58%

*I'm sorry that I do not know how to post a screen shot from etfreplay

The DD and volatility and my distrust of leveraged ETF's would be a bit much for me to use a huge chunk of money, but carving out 5-10% of my total assets to be used in a variable portfolio is intriguing.

I feel like these two asset classes are going to be very much negatively correlated for the foreseeable future, as the entire world has painted itself into a box, where rates should stay fairly low and Central Banks are fighting an intense battle between inflationary/deflationary forces.

A tight money recession does not seem imminent but something like that would probably crush this type of portfolio.

Posted: **Sun Jul 15, 2012 5:06 pm**

As a follow up, the 1x version of this ( 50% XLE and 50% TLT) during that same time frame produced:

Total Return: 63.8%
CAGR: 17.9%
Sharpe: 1.46
Max DD: -6.39%

Certainly this is a favorable time frame for this portfolio, as the energy sector was just coming off 08/09 lows and LTT's have done very well since.

However when you compare it to 100% XLE, you're still getting a big addition to your return just from volatility capture and much lower portfolio volatility.

XLE alone during the same time frame:

Total Return: 47.6%
CAGR: 13.9%
Sharpe: .57
Max DD: -29.23%

TLT alone:

Total Return: 57.8%
CAGR: 16.4%
Sharpe: .91
Max DD: -17.08

Posted: **Mon Jul 16, 2012 9:10 am**

clacy wrote: Using some of Clive's ideas regarding volatility capture on leveraged ETF's I ran a simple portfolio of 50% ERX (Direxion 3x Energy) and TMF (Direxion 3x Long Dated Treasury). Rebalanced quarterly for the last 36 months produced the following:

Total Return: 296%
CAGR: 58.3%
Sharpe: 1.55
Max DD: 22.58%

*I'm sorry that I do not know how to post a screen shot from etfreplay

The DD and volatility and my distrust of leveraged ETF's would be a bit much for me to use a huge chunk of money, but carving out 5-10% of my total assets to be used in a variable portfolio is intriguing.

I feel like these two asset classes are going to be very much negatively correlated for the foreseeable future, as the entire world has painted itself into a box, where rates should stay fairly low and Central Banks are fighting an intense battle between inflationary/deflationary forces.

A tight money recession does not seem imminent but something like that would probably crush this type of portfolio.

Thanks to Clive for these two great funds that seem to be inversely correlated very nicely, and thanks to you for backtesting. I'm curious, were you able to see if any other rebalancing period gave better results? Or perhaps, if rebalancing based on 75/25 bands would be better than quarterly? I suppose only subscribers to etfreplay can test various rebalancing schemes.

This might give me something to do with my $10K VP play money that has been performing poorly in long term SPY/TLT/GLD options.

Posted: **Mon Jul 16, 2012 10:51 am**

Clive wrote:
Thanks to Clive Clacy for these two great funds that seem to be inversely correlated very nicely

Apologies for my mistake... Clacy found the funds.

Posted: **Mon Jul 16, 2012 8:56 pm**

Storm, unfortunately you only have time-based rebalancing capabilities with etfreplay (daily, monthly, quarterly, yearly).

In my tests, quarterly seemed to be the best option. Yearly rebalances with a 3x leveraged product could spell trouble and monthly rebalances too frequently to catch good trends, IMO.

Posted: **Mon Jul 16, 2012 9:02 pm**

clacy wrote: Storm, unfortunately you only have time-based rebalancing capabilities with etfreplay (daily, monthly, quarterly, yearly).

In my tests, quarterly seemed to be the best option. Yearly rebalances with a 3x leveraged product could spell trouble and monthly rebalances too frequently to catch good trends, IMO.

If you were implementing it yourself in a VP, would you be inclined to do quarterly rebalancing, or something like 75/25 bands?

Posted: **Mon Jul 16, 2012 10:18 pm**

I am not proficient enough at back testing to really say how bands would affect the returns so I would probably stay with quarterly. I am considering implementing this after the next 7-10% DD this portfolio undertakes with about 10% of my trading capital.

Posted: **Mon Jul 16, 2012 10:44 pm**

clacy wrote: I am not proficient enough at back testing to really say how bands would affect the returns so I would probably stay with quarterly. I am considering implementing this after the next 7-10% DD this portfolio undertakes with about 10% of my trading capital.

I will likely try it as well. Let me know when your entry point is. I think I'll setup a tracker on smartmoney.

Posted: **Tue Jul 17, 2012 8:55 am**

In running a longer test with XLE/TLT, there was a 27.4% DD during the financial crisis in 08. I may take a small position of 4% in this portfolio on the next 5% pull back (using XLE/TLT as a proxy for the leveraged version), with the intention of averaging in up to 10% of my portfolio if the decline continues.

Along with 3x the upside potential and volatility capture, you also get 3x the damage when there is a massive draw down. We have seen a pretty good run up in most asset prices in the last 3 years due to so much stimulus being thrown into the system in the hopes of pushing people towards "risk on" trades. That is what concerns me right now and why I am going to be very cautious in entering into a leveraged position.

Posted: **Tue Jul 17, 2012 9:09 am**

clacy wrote: In running a longer test with XLE/TLT, there was a 27.4% DD during the financial crisis in 08. I may take a small position of 4% in this portfolio on the next 5% pull back (using XLE/TLT as a proxy for the leveraged version), with the intention of averaging in up to 10% of my portfolio if the decline continues.

Along with 3x the upside potential and volatility capture, you also get 3x the damage when there is a massive draw down. We have seen a pretty good run up in most asset prices in the last 3 years due to so much stimulus being thrown into the system in the hopes of pushing people towards "risk on" trades. That is what concerns me right now and why I am going to be very cautious in entering into a leveraged position.

You're absolutely right - 3 years of stellar returns might just mean this bull market has run it's course. This is a very high risk portfolio. Clive might have a good approach of using the 3x funds while staying mostly in cash to even out the volatility. Smartmoney tracker down 0.95% just today.

I'll probably enter 2.5% of my portfolio into the 3x position after a 5-7% DD, and enter another 2.5% after a similar DD. This is money I can afford to lose (although what money does anyone really want to lose?).

Posted: **Tue Jul 17, 2012 4:38 pm**

Storm wrote:
clacy wrote: Using some of Clive's ideas regarding volatility capture on leveraged ETF's I ran a simple portfolio of 50% ERX (Direxion 3x Energy) and TMF (Direxion 3x Long Dated Treasury). Rebalanced quarterly for the last 36 months produced the following:

Total Return: 296%
CAGR: 58.3%
Sharpe: 1.55
Max DD: 22.58%

*I'm sorry that I do not know how to post a screen shot from etfreplay

The DD and volatility and my distrust of leveraged ETF's would be a bit much for me to use a huge chunk of money, but carving out 5-10% of my total assets to be used in a variable portfolio is intriguing.

I feel like these two asset classes are going to be very much negatively correlated for the foreseeable future, as the entire world has painted itself into a box, where rates should stay fairly low and Central Banks are fighting an intense battle between inflationary/deflationary forces.

A tight money recession does not seem imminent but something like that would probably crush this type of portfolio.
Thanks to Clive for these two great funds that seem to be inversely correlated very nicely, and thanks to you for backtesting. I'm curious, were you able to see if any other rebalancing period gave better results? Or perhaps, if rebalancing based on 75/25 bands would be better than quarterly? I suppose only subscribers to etfreplay can test various rebalancing schemes.

This might give me something to do with my $10K VP play money that has been performing poorly in long term SPY/TLT/GLD options.

I guess you could say that I'm trying to be a poor man's version of Clive because my username has the same first two letters and I ATTEMPT to backtest some crazy ideas

Posted: **Wed Jul 18, 2012 10:38 am**

ERX up 5.7% since my (fake) entry point yesterday in my SmartMoney portfolio... With my luck I'll miss 20% of gains waiting for a 7% DD... Have to avoid the greed/fear cycle and stick to my entry points.

Posted: **Fri Jul 20, 2012 10:23 am**

Up 4.02% so far since my (fake) entry a few days ago. According to Smartmoney June would have been a really great entry point as there was about a 12% DD.

Posted: **Fri Jul 20, 2012 8:29 pm**

+4.69%... not bad for a few days :-)

Posted: **Sat Jul 21, 2012 4:21 pm**

I think another stimulus or operation twist-type program and I will go into this with a 5-10% stake.

Looking at leveraged ETF tests, I believe these stimulus programs are the start of much of the out-performance.

Posted: **Tue Jul 24, 2012 3:26 pm**

I'm preparing funds to jump on this early next week. I'm going in with a fairly substantial amount - would you suggest putting half my money in next week, then half again in a couple weeks? Or just going all in on the same day? I'm getting nervous because knowing my luck, as soon as I buy in all hell will break loose and oil will drop $20 a barrel or something...

Posted: **Thu Jul 26, 2012 4:11 pm**

6.09% up so far this week. A good entry point would have been mid-July - oil and treasuries have been on a tear since then... Everyone is trying to front run the Fed (and now the ECB, it appears).

We'll see - I might not go in next week, if it's up 10% or so. On the other hand, it might be a bad idea not to go in... Decisions; decisions.

Posted: **Thu Jul 26, 2012 4:12 pm**

Clacy, would you mind testing a 60/40 portfolio with 60% ERX and 40% TMF? I'm curious if 60/40 gives you better gains (with more volatility and max DD as well, I'd imagine).

If you have a chance to test it, please let me know if it's any better or worse.

Posted: **Thu Jul 26, 2012 5:02 pm**

Storm, sorry to not get back to you sooner...

50/50 tested better across the board. I will post specific numbers tomorrow

Posted: **Fri Jul 27, 2012 12:54 pm**

25% each in ERX, TMF, TIP and SHY rebalanced quarterly over the past 36 months broke down as follows:

Total Return: 122.7%
CAGR: 30.6%
Sharpe: 1.58
Max DD: -11.72%
SPY correlation: +.37

Not a bad happy medium. Half the DD and volatility and over half the gains.

Posted: **Fri Jul 27, 2012 7:15 pm**

clacy wrote: 25% each in ERX, TMF, TIP and SHY rebalanced quarterly over the past 36 months broke down as follows:

Total Return: 122.7%
CAGR: 30.6%
Sharpe: 1.58
Max DD: -11.72%
SPY correlation: +.37

Not a bad happy medium. Half the DD and volatility and over half the gains.

Really decent returns. I'd be worried that long term TIP might not perform as good as GLD during inflation. Have you tested ERX, TMF, GLD, and SHY?

Posted: **Fri Jul 27, 2012 8:50 pm**

4x25% (ERX/TMF/GLD/SHY):

Total Return: 140.8%
CAGR: 34%
Sharpe: 1.60
Max DD: -11.62%

during the last 36 months rebalanced quarterly

Posted: **Mon Jul 30, 2012 8:36 am**

Alright, I've collected my funds. I have just over $36K ready to go. I'm hoping for the ECB meeting this week to cut some steam out of the market - it's too overpriced due to all of the Draghi comments - before I go in later on Thursday or Friday, or early next week.

Posted: **Mon Jul 30, 2012 9:46 am**

Will you be splitting 50/50 or how will that look?

Posted: **Mon Jul 30, 2012 10:23 am**

clacy wrote: Will you be splitting 50/50 or how will that look?

50/50 rebalancing quarterly. I really like the numbers on the PP-like portfolio you ran, but since 95% of my funds are in a traditional HBPP I don't really need to emulate a PP inside my VP.

Gyroscopic Investing

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